Against the Grain

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Navigating Choppy Waters (in Luxury)

The market is a vengeful mistress. After 8 relatively strong months and a 2014 YTD return of just under 9% through August, the S&P took a wicked left turn, wiping out almost all of that gain over the course of September and early October.

It can be hard to remember that a responsible investing time horizon should be measured in years and not weeks or days, especially when headlines of eminent collapse are a daily occurrence. And it’s hard to stomach daily moves when volatility ramps up; no one enjoys losing more than 1% of their wealth in a day unless it involves a really, really good time in Vegas.

The good thing about volatility is that it often creates options. If stocks are popping, you can take some off the table, and if they are collapsing, you might pick up a favorite name. That’s why we always have dry powder available. If you are all-in from the get go, there’s neither margin for error nor the opportunity to capitalize on bargains. Being 100% invested in any one thing (including a diversified equity portfolio) is risky business*.

Maverick and I have been discussing the benefit of low oil prices. While energy stocks take a hit, there are plenty of industries in which gas prices are one of their biggest expenses.

I’m looking at Royal Caribbean Cruises (RCL) in particular. While fuel is only ~12% of costs, and the company hedges much of their near term volatility, over the long term, lower oil prices can add a couple points to their margins, driving a large improvement in the bottom line.

In other words, low fuel = bueno. All things aside, RCL’s stock has tanked in the last month in lockstep with oil prices despite their inverse relationship:

Now I have plenty of issues with the cruise business: They don’t pay taxes because they operate offshore. Every dollar they make gets dumped back into new ship construction (though RCL is paying out a tidy 2% dividend). And shareholders rarely see the cash being produced by the business. For a trade, however, I’m comfortable owning the group, and if we find a down day we might pick up a little for a short term play.

It’s important to note that RCL has also bounced back off its lows the past three days. If the bounce continues, we’ll probably let this one go and wait for the next opportunity. If not, ATG may be throwing on the flip flops for a quick sea-faring expedition.